The Alternative Investment Management Association

Alternative Investment Management Association Representing the global hedge fund industry

RQFII – the new Silk Road to China

Duke Du Jinsong, Managing Director, BOC Internatonal; and Fanny Wong, Head of Custody of Bank of China (Hong Kong) Limited

Q4 2013


Following the recent visit to China by Rt Hon George Osborne, the British Chancellor-of-the-Exchequer, the Renminbi Qualified Foreign Institutional Investor (RQFII) program has become a hotter topic in London, and possibly elsewhere as well. To the decision makers in Beijing, RQFII underlines the ambition of the Chinese Dream depicted by the new leadership under Mr. Xi Jinping and Mr. Li Keqiang, who want to push forward the internationalization of RMB – which had not been allowed to cross the border since 1949 until early this century. To asset owners in the US and Europe, RQFII might mean a new Silk Road which will lead their money into the second-biggest economy of the world. Statistics from the Chinese government have already shown that net capital inflows under the QFII/RQFII schemes reached US$66 billion in the first half of 2013, or three times growth year-on-year.


How far has the new Silk Road gone?

The RQFII program is actually a natural extension of the QFII – Qualified Foreign Institutional Investors – program, which was implemented as early as 2002. “R” stands for RMB, in the sense that the currency denomination is in RMB instead of US dollars as in the QFII program. Up to September 2013, a US$48 billion QFII quota has been granted to 216 holders. For RQFII, a total of RMB134 billion has been granted to 42 holders since its inception at the end of 2011.


What are the major differences of this new Silk Road?

Apart from the currency denomination, there are quite a few unique advantages that the RQFII program would enjoy compared to the QFII program. Based on the prevailing version of RQFII rules in Hong Kong, most of the entry barriers designed for QFII have been removed under the RQFII program.  With regard to AUM, for instance, the minimum size of an eligible QFII applicant is US$500 million, but there is no explicit AUM threshold set for RQFII applicants from Hong Kong albeit actual asset management experience and sound corporate governance is still required. Unfortunately, hedge fund managers will not be considered by the Chinese approvers for either QFII or RQFII status.


How would a foreign institutional investor apply for RQFII?

Currently there are four Chinese government agencies involved in the RQFII program, each with different roles and responsibilities. They are:

  • The China Securities Regulatory Commission (CSRC) will be responsible for approving RQFII status to foreign applicants by granting RQFII licenses.
  • The State Administration of Foreign Exchange (SAFE) will be responsible for granting RQFII quota to RQFII products, and to supervise the RQFII money flows.
  • People’s Bank of China, the Central Bank in China (PBOC) will be responsible for approving access to the Inter-Bank Bond Market, and to supervise RMB A/Cs and RQFII money flows.
  • Last but not the least, the State Administration of Taxation (SAT) will issue tax clearance certificates before non-public RQFII products can repatriate profit out of the country.

The withholding of capital gain tax (CGT) under the QFII program remains a thorny issue, which has not yet been resolved or clarified, and to some extent has caused frustration to foreign investors since its announcement in 2007.  Practically, the RQFII program is treated the same as the QFII program where CGT is concerned.

Nevertheless, foreign investors can only submit RQFII application via an appointed Chinese custodian bank. This arrangement will definitely help bridge the gaps for foreign investors in understanding the regulatory regimes, market infrastructure, market practices and industry norms in China, which are unique in their own rights and are continuously evolving as in any other emerging market.


What to do with a RQFII quota?

Under the RQFII scheme (Hong Kong version), a RQFII Holder can have the choice of seeking quotas for the following types of products:

  • Authorized open-ended public funds or listed ETFs (under multiple quotas)
  • Private funds (under multiple quotas)
  • Pool A/C for Client assets (under one quota only)

Funding can be raised in various currencies while actual remittance into China would have to be in RMB only.  RQFII investments are permissible in the following spheres:

  • Listed instruments (primary + secondary markets)
  • Fixed Income instruments in Interbank-Bond Market (secondary market only)
  • OTC Public Funds
  • Stock Index Futures
  • Cash in savings accounts

Some other important features (rules) under the RQFII (Hong Kong version) are listed as below:

  • For authorized open-ended public funds or listed ETFs, RQFIIs can enjoy the flexibility of daily repatriation.
  • For private funds or client assets accounts, the RQFIIs will have to observe the six-month capital injection requirement, the one-year lock-up rule and after that, maximum 20% repatriation per month based on the previous year-end balance.

To be or not to be?

The above has offered a glimpse of some rules of the game, but it is not meant to be exhaustive. Asset managers would need thorough planning and in-depth strategizing in their RMB policies before going down the RQFII route, as well as support in navigating through the market complexities, while keeping in view all the possible changes lying ahead of them.




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